Further guidance on income payment orders: pensions and bankruptcy
Horton v Henry: Pensions clarified
We previously discussed the uncertainty surrounding the treatment of pensions in a bankruptcy which arose from two conflicting high court decisions: Raithatha v Williamson  EWHC 909 (Ch) and Horton v Henry  EWHC 4209 (Ch).
In Hinton v Wotherspoon  EWHC 623 (CH) (where this firm successfully represented the trustee in bankruptcy, Lloyd Hinton of Insolve Plus Limited), the court commented that the approach in Horton v Henry  EWHC 4209 (Ch) was "plainly correct".
The trustee in Horton v Henry appealed. The Court of Appeal's judgment has now been handed down and it upholds the decision of the High Court. It confirms that if an election has not been made, the mere existence of a drawdown fund was not sufficient to establish an 'entitlement' (and therefore income) for the purposes of an income payments order.
Under s.310 of the Insolvency Act 1986 (the "Act"), a trustee in bankruptcy can apply for an income payments order ("IPO") requiring a bankrupt to make regular payments from their income to the bankruptcy estate. Under s.310(7) of the Act, a bankrupt's income includes every payment to which the bankrupt becomes entitled – this includes any payment under a pension scheme.
The point at which a bankrupt becomes "entitled" to undrawn pension funds (so that they form part of their income under s.310(7)) was previously subject to two conflicting decisions.
In Raithatha v Williamson, the High Court held that an undrawn pension could be subject to an IPO. Further, the court could order that the bankrupt make an election to draw down on the pension to satisfy an IPO.
However, in Horton v Henry, the High Court held that undrawn pension funds did not constitute funds to which the bankrupt was entitled, and therefore could not be included in an IPO. In that case, the Trustee appealed to the Court of Appeal (the "Horton Appeal"). The Deputy Judge, Mr. Robert Englehart QC, gave permission to appeal on the following point of statutory interpretation: "Does a pension entitlement which a bankrupt has a present right to elect to draw down payment from (which he has not yet exercised) fall to be included in the assessment of his "income" to which he is entitled, under section 310(7) of [the Act]?"
The Horton Appeal
In the Horton Appeal, the trustee had two arguments:
1. Even if a bankrupt's present entitlement to draw down payments was not income within the meaning of s.310(7), a trustee could use s.333(1) (i.e. the power to compel a bankrupt to assist) to require a bankrupt, who is contractually entitled to draw down pension (but has not done so), to elect to do so, so that the trustee may apply for an IPO under s.310 in relation to the funds drawn, or to be drawn, down.
2. The words "payment in the nature of income ... to which he from time to time becomes entitled" in s.310(7) meant that once a bankrupt became entitled to draw down his pension, both his vested right and the subsequent payments fell within s.310(7) so that he could be compelled under s.363(2) or s.333 to make the election.
The court rejected both arguments. It held that:
1. A trustee cannot use s.333(1) of the Act to force a bankrupt to make an election to enable him to carry out his s.310(7) functions.
Under the Act and the Pensions Scheme Acts 1993 and 1995, such pension rights are expressly excluded from the bankruptcy estate and the after-acquired property provisions. Therefore, to allow s.333(1) to be used in this way would, in the court's judgment, "drive a coach and horses through the protection afforded to a bankrupt's pension rights by the Insolvency Act and pension legislation...[by] converting excluded property into "income"."
2. A contractual right to elect a drawdown from a pension was not "payment in the nature of income" which is "from time to time made to him or to which he from time to time becomes entitled" for the purposes of s.310(7) of the Act.
The Horton Appeal confirms that (i) Raithatha was decided incorrectly; and (ii) undrawn pension payments, even when the bankrupt is technically entitled to do so, are not yet "income" forming part of the bankruptcy estate.
This of course reduces the 'pot' available to trustees in bankruptcy in applying for an IPO. However, it is worth noting that under s.342A of the Act a trustee in bankruptcy can apply to court for an order challenging excessive contributions into a registered pension arrangement.
This article was written by Aziz Abdul. For more information please contact Aziz on +44 (0)20 7427 1024 or firstname.lastname@example.org.